Brazil Exploits Ethanol as a Substitute for Petroleum

After the first great global oil crisis in 1973, the Brazilian government decided to create an alternative fuel, ethanol, which would substitute for gasoline and do away with the country’s nearly total dependence on derivatives of crude oil. In 1975, a program known as “Proalcool” was born, using the government’s resources for the research and development into new fuels. The program also provided subsidies for sales of the vehicles and the fuel, while also reducing taxes.

By the middle of the 1980s, 96% of all new cars sold in Brazil were running on ethanol. In those days, Brazil went from having a serious shortage of supply to an excess of demand. When global oil prices dropped at the start of the 1990s, Brazilians went back to buying gasoline cars. By 2003, barely 10% of all new cars sold in Brazil were using ethanol.

In 2004, another revolution took place – the introduction of new cars that have flexible motors known as “flex” – or “bi-combustible.” In other words, they operate by using either alcohol or gasoline, or with a mixture of both fuels in various proportions. Because alcohol prices were low, consumption of the fuel grew. Car sales reflected that pattern. By last December, 73% of all cars sold in Brazil were “flex” cars.

As consumption rose, so did prices. As a result, in 2005, the price of ethanol increased 28%, compared with an official inflation rate of only 5.69% for that entire year. At the beginning of this January – the harvest season for sugar cane, the main raw material in the production of ethanol – the price had risen by more than 6%. This created a minor crisis involving the federal government and the producers and distributors of ethanol. Within days, however, they managed to achieve an agreement to place a ceiling on prices.

This crisis has also generated a series of uncertainties: Is Brazil prepared to use ethanol as its definitive alternative to petroleum-based fuels? In addition, does Brazil have the capacity to provide this benefit to other countries, mainly big oil consumers such as the United States?

Is Ethanol a Real Alternative to Petroleum?

The use of ethanol as an automobile fuel is already a reality, says Luis Augusto Barbosa Cortez, a professor of agricultural engineering at UNICAMP, the state university in Campinas [Brazil]. “Nowadays in Brazil, there are bi-combustible [dual fuel] cars in Brazil, and they operate by using 25% alcohol and 75% gasoline,” Cortez says. Gasoline sold in Brazilian service stations needs to have at least 25% anhydrous alcohol.

Petrobras, Brazil’s largest petroleum industry, announced in January that it is planning to build an “alcohol duct” – a pipeline for transporting ethanol between the state of Goias in the center of the country and São Paulo, in Brazil’s southeast.

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Although ethanol is already a reality in Brazil, Cortez believes that it is fundamental for the government to play a broader role by creating market rules and regulations, because there is a risk of supply shortages. This could occur because there is a very close link between ethanol production and sugar production; both are derived from sugar cane. If the price of sugar is high enough, producers will not hesitate to stop producing ethanol, and produce sugar instead. Moreover, forecasts for the sugar market are very positive. The World Trade Organization recently declared that the European Union’s restrictions on sugar imports are illegal. The decision could open new markets for Brazilian sugar.

Cortez warns that the Brazilian government “must watch out for the interests of consumers of sugar or alcohol; it must see if there are sufficient regulatory mechanisms; whether there are sufficient supplies; if there is a price policy; whether there are means available for maintaining prices, and so forth.”

Outside Brazil, there is also growing interest in ethanol as an important source of fuel. In recent policy speeches, U.S. President George W. Bush has strongly emphasized the use of alternative energy sources, including ethanol, as a way to reduce U.S. dependence on petroleum. Nowadays, U.S. cars consume as much ethanol as Brazilian cars. However, unlike the situation in Brazil, only 600 of the 180,000 service stations in the U.S. supply ethanol [to consumers]. As a result, ethanol consumption more often involves a mixture of ethanol and gasoline, at a proportion of 10% ethanol and 90% gasoline.

Many Advantages and Few Disadvantages

Ethanol provides a range of advantages over other kinds of fuel, says Aparecida de Angelo Teixeira, an economist at the Pontifical Catholic University of São Paulo. On the one hand, she says, “In some regions of Brazil, the price of a liter of alcohol is from 40% to 45% lower than the price of gasoline.” On the other hand, she adds, “although motors that use alcohol consume more fuel per mile [than gasoline motors], it costs 30% less to market alcohol than it costs to market gasoline, which is an advantage [for alcohol]. In addition, alcohol’s operational costs are lower; it pollutes less and it is produced from sugar cane, which is a renewable resource, unlike petroleum. And don’t forget that ethanol can be obtained from many other vegetables.” As a result, “as petroleum consumption increases – and prices have gone above the $60 per barrel market – alcohol is once again becoming an attractive product,” she notes.

Reinaldo Pisani Júnior, a chemical engineer and professor at the University of Ribeirão Preto, studies the environmental advantages of using ethanol. “The quantity of carbon dioxide that cars emit when they burn alcohol is later reabsorbed when sugar plants grow,” he says. “If you analyze the flow of carbon, you notice that the balance of carbon in this context is slightly positive; the plant absorbs a bit more carbon than the alcohol releases when it is burned [in the motor]. So, overall, alcohol has a beneficial impact on the greenhouse gas effect.” In addition, Pisani explains, when you add alcohol to gasoline, you reduce total emissions of both carbon monoxide and related particulates.

From an economic point of view, Pisani stresses that alcohol makes a very positive contribution to Brazil’s trade balance. Large profits from ethanol production have led to lower production costs for the sugar industry, raising the product’s competitiveness on an international scale. For Brazil, alcohol production means reduced petroleum imports of 200,000 barrels a day. In addition, the alcohol and sugar industry generate more than one million jobs in Brazil.

Pisani is also optimistic about Brazil’s production capacity. “When they began to plan for Proalcool, they estimated that Brazil had the capacity to produce 16 billion liters of ethanol a year. Our current production is now around 10.4 billion liters [a year]. This means that we could still have an additional increase of 60%.”

Cortez is one of many observers who see the alcohol fuel as a good business opportunity for Brazil. “From the environmental point of view, it is excellent. And for us, it is a strategic product. With our technology we can compensate for the volatility of petroleum prices in the global marketplace. Brazil can earn a lot of money from alcohol.” In addition, Cortez believes ethanol production can continue to adapt to future technological advances. “The ‘hybrid’ electric-gasoline car, which is used in countries like the U.S. and Japan, can also function on alcohol. And fuel cell cars, which will use hydrogen as a fuel, could use alcohol as a solution for generating hydrogen within the cars themselves. They could function as a transformer, producing hydrogen from alcohol, although that will take many years of research,” Cortez says.

Clearly, however, alcohol also has some disadvantages. One problem is that large amounts of electrical energy must be consumed in its production and in the generation of its residual contaminants. However, for most experts, these problems are relatively small and they can be easily solved. Nevertheless, when it comes to evaluating the potential for exporting this raw material and technology to other countries, experts are not uniformly optimistic.

Doubts about Brazil’s Export Potential

“For Brazil, which is efficient in the production of ethanol, it would be quite advantageous to export technology for the production of the bi-combustible [dual fuel] car, as well as technology for producing ethanol,” says Teixeira. The problem, she adds, is that “it would create environmental problems if we transformed this country into an immense sugar plantation in order to help our international trade balance and benefit a small portion of our population. In addition, there is the possibility that it would break the foundations of the international sugar market and result in an imbalance in prices. The application of the Brazilian model to other countries, such as the U.S. for example, is possible, although it would have to be adapted in many ways.”

For all that, Teixeira believes that Brazil should be able to supply ethanol to other markets. “However, this would lead to a re-organization and to a momentary internal imbalance in international prices and the distribution of alcohol and sugar to processors. The sugar and alcohol industries are in the hands of the private sector. The government does not have access to inventories [or stocks] of the crop that could regulate the supply. That means, there could be a shortage of supply between harvests.”

Although Cortez is aware of the close links between the alcohol market and the sugar crop, he is moderately optimistic about Brazil’s prospects as an exporter. “If we need to increase production by 5 billion liters over the next two or three years, will Brazil be able to respond to the demand? If there are not a lot of problems in the sugar market or in the international market, this will not be impossible.

“It is hard to imagine that in the future, alcohol can entirely substitute for gasoline; I do not think that is going to happen,” adds Cortez. “However, it seems to me that, little by little, we are going to move, over a period of 10 or 20 years, to a significant percentage of substitution. Today, 2% of the fuel used in the world’s cars is alcohol. One percent of that comes from the Brazilian market and 1% from the U.S. It would not surprise me if, in 10 years, we reach the 4% mark, and in 20 years, if that number reaches about 8% or 10%.”

Finally, Brazilians have shown creativity and skill at developing new technologies for reducing their dependence on petroleum. For example, Embraer, the third-largest airplane manufacturer in the world, produces the Ipanema, a plane equipped with a motor that uses alcohol. There has also been significant progress in using natural gas (which produces far less pollution than gasoline) in dual-fuel cars that use both gasoline and natural gas, and in cars that use three kinds of fuel – gasoline, natural gas and alcohol. Brazil is also producing another revolution in the world of fuel. It is developing biodiesel. Produced from vegetable oils, biodiesel fuel can substitute for [conventional] diesel fuel, which is derived from petroleum.

APA

Brazil Exploits Ethanol as a Substitute for Petroleum.
Knowledge@Wharton
(2006, February 22).
Retrieved from http://knowledge.wharton.upenn.edu/article/brazil-exploits-ethanol-as-a-substitute-for-petroleum/